Finance Theory I

This lecture presents the limitations of CAPM and the practical implications of the adaptive markets hypothesis. The latter part of lecture is a summary of the entire course and a recap of key concepts.

This lecture explores behavioral finance, why people avoid uncertainty, the link between rationality and human emotion, and human preferences for decision-making. Discussion and simulations frame the adaptive markets hypothesis and its implications.

This lecture presents applications of the NPV rule and project financing, as well as alternatives to NPV. In the latter half, an overview of the theory of market efficiency and the example of the Space Shuttle Challenger disaster are presented.

This lecture starts with an example that uses CAPM to explain market-cap portfolios. The focus then shifts to making financial decisions as a manager, including applying the NPV rule and calculating project cash flows.

This lecture covers how to calculate a proper discount rate, the application of CAPM, and performance evaluation using the security market line.

This lecture introduces the tangency portfolio and the Sharpe ratio as a measure of risk/reward trade-off. The expected return of efficient portfolios is presented in the capital asset pricing model.

This lecture walks through calculating properties of mean and variance for portfolio returns. Mean, standard deviation, and correlation are used as measures in portfolio analysis.

This lecture covers empirical properties of stocks and bonds, patterns of returns, and statistical measures of risk of a security. An introduction to the portfolio as a combination of securities and what constitutes a good portfolio is given.

This lecture continues to cover option pricing by deriving a generalized binomial model, and the implications of the conditions under which the formula holds. Statistical background and context is given in preparation for dealing with risk and return.

This lecture covers interpreting payoff diagrams of call and put options and how to use the diagrams in option strategizing and betting on volatility. A brief historical background for option-pricing theory is also given.

This lecture includes examples of calculating payoff, and pricing forward and futures contracts. Options, a derivative, are presented as another kind of security.

This lecture covers the motivation, definition, features, and examples of forward and futures contracts in light of the uncertainty of exchange rates, illiquidity, and counterparty risk.

This lecture provides an overview of equities and models with which to price equities, with a focus on using the dividend discount model.

This lecture explores securitization's impact on intermediation, sources of risk in corporate bonds. An example is given to demonstrate the effect of priority of payouts on expected values and the pricing of bonds, and the additional effect of correlation.

This lecture continues to work through the valuation of a coupon bond, and using the law of one price in working with multiple coupon bonds. The lecture also covers methods for measuring the interest-rate risks of a bond.

This lecture introduces spot rates and forward rates in the context of yield curves and interest rate forecasts, and models for term structure interest rates. Examples are given during lecture using data from U.S. Treasury Securities.

This lecture starts with a discussion of leverage ratio with an example from Lehman Brothers. The lecture then covers inflation, real and nominal rate of return, trading frequency, the framework for valuation with an example of a coupon bond.

This lecture covers examples on calculating net present value, comparing perpetuities and annuities, and conventions for compounding.

This lecture presents the definition of an asset as a sequence of current and future cash flows, and the implications of that definition. Valuation of cash flows is presented in the context of time, certainty, and the present value operator.

This lecture introduces the framework of financial analysis, the flow model of the economy, the factors that affect financial decisions, and the fundamental principles of finance.